InvestorQ : Why are foreign portfolio investors selling so aggressively in Indian bonds?
diksha shah made post

Why are foreign portfolio investors selling so aggressively in Indian bonds?

2 years ago

In the current year, India saw heavy selling in debt and equity in the month of March. However, subsequently FPIs returned with a vengeance to equities but continued to sell or remain passive on debt. For example, FPIs have infused Rs.110,000 crore in equity in the current year but have been net sellers of Rs.105,000 crore in debt.

What are the reasons? One major reason is the negative real rates. Real interest rates are the return that you earn on your bonds after adjusting for inflation. In last 6 months since inflation shot up sharply, the real rates have slipped into the negative. To add to insult to injury, the bond yields also dipped sharply due to lower repo rates and abundant liquidity.

Due to the bond yields being lower and inflation staying above the 7% mark, the real rates in India have been in the negative zone for some time. This has discouraged FPIs from investing in Indian debt. Why would institutional investors pay to invest in a risky emerging market like India? That is the reason, the selling in Indian bonds is so pronounced.

India has also been slow in making Indian bonds available in global markets. For example, in 2019, India came up with the $5 billion sovereign bond plan but shelved it. Because, India has never issued sovereign bonds to global investors, the appetite for Indian debt in the global financial centres is very low and that has kept Indian bonds less preferred.